End of QE turns institutions into sellers

Kevin Marder is a guest columnist and a co-founder of MarketWatch. He is
principal of Marder Investment Advisors Corp. and a contributor to
The Gilmo
Report. Previously, he served as chief market strategist for Ladenburg Thalmann
Co. and developed institutional fixed-income risk management software for
Capital Management Sciences.

The Nasdaq Composite is forming a quasi-broadening top/megaphone/expanding triangle pattern. After outperforming for a number of weeks, the Naz now lags over the most recent six-day period. While this could easily right itself, it reflects a slight de-risk mentaliy.

A more blatant divergence and sign of de-risking exists with the small-capitalization sector which has lagged the market for six months. This is the type of divergence that, in a mature bull market, does not tend to fix itself. It tends to continue until sometime in the next bear market.

At the heart of this reining-in of the speculative sentiment is the large investor. He cannot simply buy something and then trade out of it a week later. Large positions can take months to build up and months to break down without adversely impacting the market. In advance of the end of a rate-cutting cycle, institutions prepare for the eventual end of the bull market by exiting positions in the issues deemed to be the least liquid, the small-capitalization ones.

This began occurring in a stealthy way following 2013's big advance. While smaller shares have not fallen, they have moved sideways on balance since early this year. Yet this resulted in significant underperformance in a market in which the averages kept going up, as the above chart shows.

Where all of this begins to affect the growth-stock speculator is when one realizes that riskier growth stocks are also on the list of names that will be exited prior to the end of a rate-cutting cycle. This may explain why institutions are not eager to fully commit to this market. Certainly, the lack of trading volume on up days is evidence of this lackluster participation.

A liquid glamour like FacebookFB, +0.65%
may also be "over-owned," that point at which an institutional favorite has few buyers left as everyone who wanted to get in, already has.

So there are different cross-currents at work. None of these need to be examined or analyzed other than to recognize that this is a mature bull. And mature bulls often do not generate the broad gains in growth stocks seen earlier in a bull.

Among the names, Tekmira PharmaceuticalsUS:TKMR
is a biotechnology concern specializing in therapeutics for oncological and metabolic applications using unique delivery technologies. One of the company's drugs is designed to treat the ebola virus.

The company lost money in 2013 and is forecast by Wall Street to post losses in 2014 and 2015. Revenue growth has been sporadic. In short, there are no fundamentals here, and one "trades off the chart." Some speculators may feel uncomfortable with this, while other more-aggressive operators may feel right at home.

TKMR was highlighted on the Twitter feed more than once recently and also in the Marder Report on Sept. 1, where it was noted "In any case, this is not a title that would appear likely to bore anyone."

The chief reason why the potential is believed to be high for TKMR is a technical one: The stock already made moves of 400% and 300% earlier this year. A stock that has proven it knows how to locate the winner's circle is always favored. Currently, price forms a six-week base. The previous buy point of 22.26 as discussed in the Sept. 1 report was cleared Monday on convincing volume of 237% above normal.

At this point, there is not an attractive entrance available. Price may end up backing and filling around the prominent high of 26.05 which might offer the right entrance, especially if volume dries up.

TKMR is not just a speculative stock, but an extremely speculative stock, and should be treated as such. Prodigious potential, prodigious risk.

Overall, growth stocks offer very few pattern setups for the speculator. While not exactly coming apart at the seams, names like YYYY, +1.36%Hi-Crush PartnersHCLP, -4.59%
and YelpYELP, -0.44%
are no longer being accumulated to any great extent. It is doubtful whether something like FacebookFB, +0.65%
can continue to rise without at least a few solid-volume up days to keep the crowd honest.

The hope here is that September and perhaps October will be used as a basing period before the often-dynamic November-December period. Either way, it always pays to keep one's mind open as to what can happen, and never let emotions go too far in either direction. For the time being, a high cash position is warranted.

The views contained herein represent those of Marder Investment Advisors Corp. ("MIAC"). At the time of this writing, of the stocks mentioned in this report, Kevin Marder and/or MIAC held no positions, though positions are subject to change at any time and without notice. This information, which may have been previously disseminated, is issued solely for informational and educational purposes and does not constitute an offer to sell or a solicitation of an offer to buy securities. The information contained herein is based on sources which we believe to be reliable but is not guaranteed by us as being accurate and does not purport to be a complete statement or summary of available data. Past performance of any security or strategy is not a guarantee, nor is it necessarily indicative, of future results. Opinions expressed herein are statements of our judgment as of the publication date and are subject to change without notice. Entities including but not limited to MIAC, its members, officers, directors, employees, customers, agents, and affiliates may have a position, long or short, in the securities referred to herein, and/or other related securities, and may increase or decrease such position or take a contra position.

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